December 19, 2019
New data from the Census Bureau has brought the impact of the Tax Cuts and Jobs Act (TCJA) on low-income families into clearer focus. While most of the tax cuts focused on high-earners and corporations, ordinary American families also benefited through an expanded and modified Child Tax Credit (CTC):
- The basic per-child CTC doubled in
value from $1,000 to $2,000;
- The earnings threshold for
refunding the CTC was moved down to $2,500 from $3,000;
- And the maximum refundable credit
was increased from $1,000 to $1,400 and indexed to inflation.
Overall, estimates from the Joint Committee on Taxation shows CTC
expenditures more than doubled, growing from $54 billion in 2017 to
billion in 2018. While the general CTC expansion was offset by the elimination
of the personal exemption for many families, the refundable portion generated
significant net gains for families lower down the income ladder. In fact, based on estimates from the Current Population Survey,
outlays on the refundable portion of the credit increased by roughly $10
billion per year, from $16 billion to $26 billion. This is a substantial
increase in aid to low-income families and children. To put the size of this
increase into perspective, $10 billion is about 60 percent of the $16 billion
spent annually on Temporary Assistance for Needy Families, the nation’s primary
cash-based social insurance program for families.
The Supplemental Poverty Measure (SPM), which accounts for income transfers in its calculation, declined from 13 percent in 2017 to 12.8 percent in 2018. Based on my analysis of the Current Population Survey, the above changes to the refundable portion of the Child Tax Credit brought more than 750,000 additional persons out of poverty as measured by the SPM in 2018, relative to 2017. Almost half of the individuals lifted from poverty in 2018 were children. The number of families receiving a refundable credit grew 25 percent, and the typical benefit that these families received increased by about one-third.
While the number of individuals lifted over the poverty threshold represents an achievement, the phased-in refundability of the credit meant that the primary beneficiaries of the credit were largely situated right around the poverty line (see chart below ). The tax cut bill did little for the poorest families living well below the poverty line, however. Future expansions of the CTC can correct for this by increasing the phase-in rate, introducing first-dollar refundability, or making the tax credit fully refundable.
In terms of the broader distributional impact, the expansion to the refundable CTC disproportionately benefited rural families. Across all households, those living outside a metropolitan area benefited on average by roughly 25 percent more than those living in or around cities.
At the regional level, refundable CTC expansion delivered its most significant benefits to households in the South and Southwest. Families in Utah gained the most of any state — an average benefit of roughly $145 across all households in the state.
Finally, the expansion to the CTC’s refundability disproportionately benefited minority families. In particular, Hispanic families experienced substantial benefits as a result of this policy, owing to their larger typical family size.
These major improvements to the refundable CTC
almost didn’t happen. The provisions faced significant opposition from supply-siders,
both in the halls of Capitol Hill and business-conservative outlets like the Wall Street Journal. Senators Mike Lee
(R-Utah) and Marco Rubio (R-Fla.) deserve credit for pushing for the changes
that they got, even if they weren’t able to get everything that they asked for.
Without the changes to the CTC, the TCJA would have done essentially nothing
for America’s left-behind families.
Nonetheless, the refundable CTC remains an
area of unfinished business. Future reforms should lift the per-child cap on
refundability to $2,000, and made fully refundable regardless of tax liability.
The substantial poverty impact we have already seen from a modest increase in
the credit should serve as a demonstration of its efficacy going forward. The
beneficiaries represent core constituencies from both of the two major parties.
In principle, the broad-based appeal of pro-family tax benefits means that the CTC
remains ripe for further expansion.
The Census Bureau revamped the CPS methodology prior to the 2019 release. As a result, estimates for 2017 are derived from the 2018 ASEC Bridge File in order to ensure comparability.
Photo credit: Pixabay